Turn Down the Volume

February 3rd Weekly Market Update

January saw a loss of 3.5%, the biggest one-month loss in the S&P 500 Index since May 2012. The main driver of the market weakness seems to be sharp currency declines and accompanying stock market losses in several emerging markets, such as South Africa and Turkey.

It is not unusual to see the market dip 3% in a month, especially after such a strong run-up throughout 2013. We have seen 18 months of losses for the S&P 500 since the bull market began 59 months ago in March 2009 — that is about one-third of the months. The average decline during those months was 3.1%. So January’s 3% stock market dip is not particularly unusual or alarming.

What was unusual about January’s stock market trading was the volume. Importantly, the stock market and trading volume have not been on friendly terms in recent years. In fact, over the past five years’ low-volume days (when stock trading volume is below its 50-day moving average) stocks have generally gone up, as you can see in Figure 1. Conversely, when volume is above average, stocks have generally been flat to down.

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